May 14 (Bloomberg) -- Best Buy Co. founder Richard Schulze
will step down as chairman after a probe found he failed to tell
the board about allegations that then-Chief Executive Officer
Brian Dunn was having an inappropriate relationship with a
female employee.

The internal probe found Dunn acted inappropriately, such
as sending multiple e-mails and text messages to the woman,
lending her money and giving her free tickets to concerts and
sporting events, Richfield, Minnesota-based Best Buy said today
in a statement. Schulze will be replaced by director Hatim
Tyabji after the annual meeting on June 21.

Schulze’s resignation marks a complete change at the top of
Best Buy, which has struggled to compete against rivals such as
Amazon.com Inc. and Apple Inc. Two weeks before Dunn’s
resignation was announced, the company reported a $1.7 billion
fourth-quarter loss and said it would close 50 big-box stores.

“If none of these things had happened,” Best Buy “still
faces one of its most significant challenges in the history of
the company,” Brad Anderson, Best Buy’s CEO before Dunn took
charge in 2009, said in a telephone interview. “They have a
tremendous destabilization of power at the top of the
organization, both at the CEO level and the chairman level.”

Director G. Mike Mikan is serving as Best Buy’s CEO while
the board seeks a permanent replacement. The company has said
that search may take as long as nine months.

Best Buy rose 1.5 percent to $19.56 at 4:03 p.m. in New
York. The shares have declined 16 percent this year.

Dunn’s Judgment

Dunn, 52, and the 29-year-old female employee, who wasn’t
identified, acknowledged meeting for lunches and drinks during
the work week and on weekends among numerous incidents that
“reflected poorly on the CEO’s judgment,” according to the
audit committee’s report on the investigation.

“The growing awareness and speculation surrounding the
friendship created friction and disruption in the workplace and,
according to her supervisor, impeded efforts to supervise the
female employee,” the committee said.

Dunn gave the woman tickets to at least seven concerts and
sporting events and engaged in “a significant amount” of
texting and mobile-phone conversations with “no identifiable
business purpose,” the company said. On one four-day and one
five-day trip abroad last year, Dunn contacted her by mobile
phone at least 224 times, including 33 phone calls, 149 text
messages and 42 picture or video messages, the company said.

He also loaned her about $600 of his own money so she could
change a plane ticket from Las Vegas, Best Buy said.

Dunn Confronted

Schulze was made aware of the allegations about Dunn in
December. While he confronted Dunn with the complaints, he
failed to inform the board’s audit committee about them, the
company said. It also was “inappropriate” for Schulze to
reveal to Dunn the identity of the employee who raised the
concerns because of “serious risks of employee retaliation and
company liability,” Best Buy said.

Schulze helped start Best Buy as a single store with three
employees in 1966. Dunn was hired as a salesman at one of the
company’s stores in 1985 and went on to become a store manager,
a regional manager and regional vice president. He was named
executive vice president of U.S. retail operations in 2002, a
few months before Schulze stepped down as CEO and handed the job
to Anderson, another company lifer.

Schulze had known Dunn for years and supported his
promotion to CEO, saying in 2009 that he was a product and
steward of Best Buy’s “unique culture.”

‘Less Objective’

It’s problematic “if you’re very close to the person whom
you’re monitoring,” said Charles Elson, director of the John L.
Weinberg Center for Corporate Governance at the University of
Delaware. “The closer you are, the less objective you are and
the less effective you’re going to be, that’s the issue.”

Schulze still is Best Buy’s largest investor with 69.2
million shares, a stake of 20 percent, according to a filing
with the U.S. Securities and Exchange Commission last week.

The company announced Dunn’s resignation last month, saying
that the change was part of a “mutual agreement” that new
leadership was needed. The company later said that a board
committee was probing Dunn’s “personal conduct.” The probe
found that Dunn violated company policy by engaging in “an
extremely close personal relationship” with an employee, the
company said today.

Both Dunn and the employee have said the relationship was a
close personal friendship that wasn’t romantic, the company
said. Best Buy found no misuse of company resources or aircraft.

Dunn will receive a severance package of about $6.64
million, which includes previously earned bonuses, restricted
stock grants, a severance payment and pay for unused vacation
time, Best Buy said.